UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
----------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 0-27857
ACUNETX INC.
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(Exact name of registrant as specified in its charter)
NEVADA 88-0249812
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2301 W. 205TH STREET, #102, TORRANCE, CA 90501
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(Address of principal executive offices) (Zip Code)
310-328-0477
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.001 par value 65,429,309 shares
(Class) (Outstanding as at August 12, 2008)
AcuNetx Inc.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I - FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS 4
Consolidated Balance Sheet (unaudited) 4
Consolidated Statement of Operations (unaudited) 5
Consolidated Statement of Cash Flows (unaudited) 6
Notes to Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29
ITEM 4. CONTROLS AND PROCEDURES 29
PART II - OTHER INFORMATION 30
ITEM 1. LEGAL PROCEEDINGS 30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 30
ITEM 5. OTHER INFORMATION 30
ITEM 6. EXHIBITS 30
SIGNATURES 31
2
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
We desire to take advantage of the "SAFE HARBOR" provisions of the Private
Securities Litigation Reform Act of 1995. This Report on Form 10-Q contains a
number of forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, products, future results
and events and financial performance. All statements made in this Report other
than statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to distributor
channels, volume growth, revenues, profitability, new products, acquisitions,
adequacy of funds from operations, statements expressing general optimism about
future operating results and non-historical information, are forward-looking
statements. In particular, the words "BELIEVE," "EXPECT," "INTEND,"
"ANTICIPATE," "ESTIMATE," "MAY," "WILL," variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive means
of identifying such statements and their absence does not mean that the
statement is not forward-looking. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated or implied by these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Readers should not place undue reliance on these forward-looking statements,
which are based on management's current expectations and projections about
future events, are not guarantees of future performance, are subject to risks,
uncertainties and assumptions (including those described below) and apply only
as of the date of this Report. Our actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below "Management's
Discussion and Analysis and Plan of Operation," as well as those discussed
elsewhere in this Report, and the risks discussed in our most recently filed
Annual Report on Form 10-KSB and in the press releases and other communications
to shareholders issued by us from time to time which attempt to advise
interested parties of the risks and factors that may affect our business.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACUNETX, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2008 December 31, 2007
ASSETS (Unaudited) (Audited)
-----------------------------------------------------------------------------------------------------------------
Current Assets
Cash $102,014 $205,162
Restricted Cash 91,105 75,000
Accounts receivable, net 75,043 45,034
Inventory 137,034 204,279
Prepaid expenses and other current assets 112,341 73,685
------------------ ------------------
Total Current Assets 517,537 603,160
Property and equipment, net 14,108 18,064
Other intangible assets 116,194 150,472
Deferred tax assets 220,635 220,635
Other investments 500 0
Other assets 2,020 2,020
------------------ ------------------
TOTAL ASSETS $870,995 $994,351
================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $351,561 $395,157
Accrued liabilities 955,413 794,757
Current portion of long-term debt 83,101 72,019
------------------ ------------------
Total Current Liabilities 1,390,075 1,261,933
Convertible debt, net of debt discount of $4,625 and $6,125 for
2008 and 2007, respectively 110,376 93,876
Long-Term Debt 304,946 197,830
------------------ ------------------
Total Liabilities 1,805,396 1,553,639
------------------ ------------------
Minority Deficit (11,809) (8,394)
Stockholders' Deficit
Common stock, $0.001 par value; 100,000,000 shares authorized;
65,429,309 shares issued and outstanding 65,429 65,143
Paid-in capital 11,288,465 11,125,546
Accumulated deficit (12,276,487) (11,741,583)
------------------ ------------------
Total Stockholders' Deficit (922,592) (550,894)
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $870,995 $994,351
================== ==================
See notes to interim unaudited consolidated financial statements
4
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended June 30, For the six months ended June 30,
2008 2007 2008 2007
Sales - Products $285,463 $678,474 $505,051 $1,802,420
Cost of sales - products 59,822 128,280 189,884 356,734
------------------ ------------------ ------------------ ------------------
Gross profit 225,642 550,194 315,168 1,445,686
------------------ ------------------ ------------------ ------------------
Operating Expenses:
Selling, general and administrative expenses 336,817 717,952 666,562 1,757,359
Stock option expense (3,787) 19,441 142,996 158,518
Impairment of goodwill 0 0 0 362
------------------ ------------------ ------------------ ------------------
Total Operating Expenses 333,030 737,393 809,558 1,916,239
------------------ ------------------ ------------------ ------------------
Operating loss (107,388) (187,199) (494,390) (470,553)
------------------ ------------------ ------------------ ------------------
Other income(expenses)
Interest and other income 1,620 8,002 2,958 12,263
Interest and other expenses (26,165) (13,344) (46,963) (23,006)
------------------ ------------------ ------------------ ------------------
Total other income (expenses) (24,545) (5,342) (44,005) (10,743)
------------------ ------------------ ------------------ ------------------
Net loss before income taxes and minority interest (131,933) (192,541) (538,395) (481,296)
------------------ ------------------ ------------------ ------------------
Provision for income taxes 0 0 800 800
------------------ ------------------ ------------------ ------------------
Net loss before minority interest (131,933) (192,541) (539,195) (482,096)
------------------ ------------------ ------------------ ------------------
Minority interest in losses of subsidiaries (2,468) 0 (4,291) 0
------------------ ------------------ ------------------ ------------------
Net loss ($129,465) ($192,541) ($534,904) ($482,096)
================== ================== ================== ==================
Net Loss per share-Basic and Diluted $(0.00) $(0.00) $(0.01) $(0.01)
================== ================== ================== ==================
Weighted average number of common shares 65,405,499 62,448,443 65,345,856 62,743,612
See notes to interim unaudited consolidated financial statements
5
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR SIX MONTHS ENDED JUNE 30, 2008 2007
----------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (534,904) $ (482,096)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interest (4,291) -
Depreciation and amortization 4,504 7,564
Issuance stock and stock equity awards for services 142,996 158,518
Provision for bad debt 11,775 14,707
Amortization of debt discount 1,500 -
Intellectual property write-down 46,504
Impairment of goodwill - 362
Gain on recovery from loan loss (400) (12,000)
(Increase) Decrease in:
Accounts receivable (41,784) (38,782)
Inventory 67,245 37,110
Prepaid and other assets (38,756) (23,602)
Increase (Decrease) in:
Accounts payable and accrued expenses 118,096 172,153
------------------ ------------------
Net cash used in operating activities (227,516) (166,066)
------------------ ------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Increase in restricted cash (16,105) -
Intellectual property write-down (12,775) (4,319)
Repayment from Notes Receivable - 12,000
------------------ ------------------
Net cash provided by (used in) investing activities (28,880) 7,681
------------------ ------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stocks 20,050 30,000
Proceeds from issuance of long-term debt 150,000 -
Repurchase of common stock - (7,262)
Net proceeds from convertible debt 15,000 -
Repayments on notes payable (31,802) (242)
------------------ ------------------
Net cash provided by financing activities 153,248 22,496
------------------ ------------------
NET DECREASE IN CASH (103,148) (135,889)
CASH BALANCE AT BEGINNING OF PERIOD 205,162 202,570
------------------ ------------------
CASH BALANCE AT END OF PERIOD $ 102,014 $ 66,681
================== ==================
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ 800 $ 800
Interest paid $ 20,533 $ 236
Schedule of Noncash Investing and Financing Activities:
Retirement of common stocks for an equity-method investment $ 0 $ 14,007
Conversion of accrued interest into debt principal $ 0 $ 21,451
Issuance of stock options for accrued expenses $ 1,036 $ 0
See notes to interim unaudited consolidated financial statements
6
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN
NATURE OF BUSINESS
AcuNetx, Inc., a Nevada corporation, (the "Company" or "AcuNetx", formerly known
as Eye Dynamics, Inc. or "EDI") and its subsidiaries OrthoNetx Inc. and
VisioNetx Inc., combine diagnostic, analytical and therapeutic devices with
proprietary software to permit: health providers to diagnose and treat balance
disorders and various bone deficiencies; law enforcement officers to evaluate
roadside sobriety; and employers in high-risk industries to determine, in
real-time, the mental fitness of their employees to perform mission-critical
tasks. AcuNetx is headquartered in Torrance, California.
AcuNetx is organized around a dedicated medical division (i) IntelliNetx, a
medical division with neurological diagnostic equipment, and two separate
subsidiary companies: (ii) OrthoNetx, Inc., a wholly-owned medical subsidiary
company with devices that create new bone, and (iii) VisioNetx, Inc., a
majority-owned subsidiary company with products for occupational safety and law
enforcement.
The product line of AcuNetx and its subsidiaries include the followings: (a)
Neurological diagnostic equipment that measures, tracks and records human eye
movements, utilizing the company's proprietary technology and computer software,
as a method to diagnose problems of the vestibular (balance) system and other
balance disorders; (b) Devices designed to test individuals for impaired
performance resulting from the influences of alcohol, drugs, illness, stress and
other factors that affect eye and pupil performance. These products target the
occupational safety and law enforcement markets; and, (c) Orthopedic and
craniomaxillofacial (skull and jaw) surgery products, which generate new bone
through the process of distraction osteogenesis; and (d) A proprietary
information technology system called SmartDevice-Connect(TM) ("SDC") that
establishes product registry to individual patients and tracks device behavior
for post-market surveillance, adverse event and outcomes reporting, and creates
"smart devices" that gather and transmit physiological data concerning the
device and its interaction with patients.
7
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
GOING CONCERN
In the near term, the Company expects the operating cash flows will not be
sufficient to cover all debt and payables although it expects its sales to grow
and will be able to cover current operating costs and to reduce the working
capital deficit.
Management's plans include raising operating capital to take advantage of its
IntelliNetx and HawkEye commercial opportunities. To that end, a mezzanine debt
financing in conjunction with a commercial bank line of credit is being
considered and preliminarily structured by Management and the Board of
Directors.
This will enable the Company to focus its efforts on selling its neurological
diagnostic products that has historically been its primary business and to
increase the marketing and sales efforts for its HawkEye law enforcement
product.
The ability of the Company to continue as a going concern is dependent on its
ability to meet its financing requirements and the success of its future
operations. The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
8
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION OF INTERIM INFORMATION: The financial information at June 30, 2008
and for the three and six months ended June 30, 2008 and 2007 is unaudited but
includes all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation of the financial
information set forth herein, in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") for interim financial
information, and with the instructions to Form 10-Q Accordingly, such
information does not include all of the information and footnotes required by
U.S. GAAP for annual financial statements. For further information refer to the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2007.
The consolidated balance sheet as of December 31, 2007 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by U.S. GAAP for complete financial
statements.
The results for the six months ended June 30, 2008 may not be indicative of
results for the year ending December 31, 2008 or any future periods.
PRINCIPLE OF CONSOLIDATION AND PRESENTATION: The accompanying financial
statements include the accounts of AcuNetx, Inc. and its subsidiaries after
elimination of all intercompany accounts and transactions. Certain prior period
balances have been reclassified to conform to the current period presentation.
USE OF ESTIMATES: The preparation of the accompanying consolidated financial
statements in conformity with U.S. GAAP requires management to make certain
estimates and assumptions that directly affect the results of reported assets,
liabilities, revenue, and expenses. Actual results may differ from these
estimates.
OTHER INTANGIBLE ASSETS: Other intangible assets consist primarily of
intellectual property and trademarks. The Company capitalizes intellectual
property costs as incurred, excluding costs associated with Company personnel,
relating to patenting its technology. The majority of capitalized costs
represent legal fees related to a patent application. If the Company elects to
stop pursuing a particular patent application or determines that a patent
application is not likely to be awarded or elects to discontinue payment of
required maintenance fees for a particular patent, the Company, at that time,
records as expense the capitalized amount of such patent application or patent.
Awarded patents will be amortized over the shorter of the economic or legal life
of the patent. Trademarks are not amortized, but rather are tested for
impairment at least annually. There was no impairment of other intangible assets
for the six months ended June 30, 2008 and 2007.
9
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL: Goodwill represents the excess of the purchase price in a business
combination over the fair value of net tangible and intangible assets acquired
in a business combination. Goodwill amounts are not amortized, but rather are
tested for impairment at least annually. An impairment of goodwill of $362 was
recorded for the six months ended June 30, 2007. Goodwill was fully impaired in
2007.
NET INCOME PER SHARE: Basic net income per share includes no dilution and is
computed by dividing net income available to common stockholders by the weighted
average number of common stock outstanding for the period. Diluted net income
per share is computed by dividing net income by the weighted average number of
common shares and the dilutive potential common shares outstanding during the
period. Diluted net loss per common share is computed by dividing net loss by
the weighted average number of common shares and excludes dilutive potential
common shares outstanding, as their effective is anti-dilutive. Dilutive
potential common shares consist primarily of stock options, stock warrants and
shares issuable under convertible debt.
STOCK-BASED COMPENSATION: The Company has adopted the fair value recognition
provisions of FASB Statement No.123(R), "SHARE-BASED PAYMENT" (SFAS 123R), using
the modified-prospective-transition method. Under that transition method,
compensation cost recognized in 2007 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2007
based on the grant date fair value calculated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to December 31, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). For the six months
ended June 30, 2008 and 2007, the Company recognized pre-tax stock option
compensation expense of $142,996 and $158,518, respectively.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the EITF Issue No. 00-18, "ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES." SFAS No. 123 states that equity
instruments that are issued in exchange for the receipt of goods or services
should be measured at the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
Under the guidance in Issue 00-18, the measurement date occurs as of the earlier
of (a) the date at which a performance commitment is reached or (b) absent a
performance commitment, the date at which the performance necessary to earn the
equity instruments is complete (that is, the vesting date).
10
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS: In March 2008, Financial Accounting Standards
Board {"FASB") issued Statement of Financial Accounting Standards (SFAS) No.
161, "DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS
161"). SFAS 161 is intended to improve financial reporting about derivative
instruments and hedging activities by requiring companies to enhance disclosure
about how these instruments and activities affect their financial position,
performance and cash flows. SFAS 161 also improves the transparency about the
location and amounts of derivative instruments in a company's financial
statements and how they are accounted for under SFAS 133. SFAS 161 is effective
for financial statements issued for fiscal years beginning after November 15,
2008 and interim periods beginning after that date. As such, the Company is
required to adopt these provisions beginning with the quarter ending in February
2009. Adoption of SFAS 161 is not expected to have a material impact on the
Company's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 ("SFAS No. 159"), "THE FAIR VALUE
OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT
OF FASB STATEMENT NO. 115." SFAS No. 159 provides an option to report selected
financial assets and financial liabilities using fair value, and establishes
required presentation and disclosures to facilitate comparisons with companies
that use different measurements for similar assets and liabilities. SFAS No. 159
is effective for the Company's fiscal year beginning August 1, 2008, with early
adoption allowed only if SFAS No. 157 is also adopted. The Company is currently
evaluating the potential impact of this standard on the consolidated financial
statements.
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-3,
"ACCOUNTING FOR NONREFUNDABLE ADVANCE PAYMENTS FOR GOODS OR SERVICES TO BE USED
IN FUTURE RESEARCH AND DEVELOPMENT ACTIVITIES" ("EITF 07-3"). EITF 07-3 requires
non-refundable advance payments for goods and services to be used in future
research and development activities to be recorded as an asset and the payments
to be expensed when the research and development activities are performed. EITF
07-1 will be effective for the Company's fiscal year beginning August 1, 2008.
Currently, the Company does not anticipate that this statement will have a
significant impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "BUSINESS
COMBINATIONS" ("SFAS NO.141(R)"). SFAS No. 141(R) will replace SFAS 141, and
establishes principles and requirements for how the acquirer in a business
combination reorganizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree; recognizes and measures the goodwill acquired in the
business combination or gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R)
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Currently, the Company does not anticipate that this
Statement will have a significant impact on its consolidated financial
statements.
11
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 2007, the FASB issued SFAS No. 160, "NON-CONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF ARB NO. 51" ("SFAS No.
160"). This statement requires that noncontrolling or minority interests in
subsidiaries be presented in the consolidated statement of financial position
within equity, but separate from the parents' equity, and that the amount of the
consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated
statement of income. SFAS No. 160 will be effective for the Company's fiscal
year beginning August 1, 2009. The adoption of this statement did not have a
material effect on the Company's consolidated financial statements.
In December 2007, the FASB ratified the consensus reached on Emerging Issues
Task Force Issue No. 07-1, "ACCOUNTING FOR COLLABORATIVE ARRANGEMENTS RELATED TO
THE DEVELOPMENT AND COMMERCIALIZATION OF INTELLECTUAL PROPERTY" ("EITF 07-1").
EITF 07-1 defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. EITF
07-1 will be effective for the Company's fiscal year beginning August 1, 2009.
The Company is currently evaluating the potential impact of this standard on the
consolidated financial statements.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 ("SAB 110").
SAB 110 permits companies to continue to use the simplified method, under
certain circumstances, in estimating the expected term of "plain vanilla"
options beyond December 31, 2007. SAB 110 updates guidance provided in SAB 107
that previously stated that the Staff would not expect a company to use the
simplified method for share option grants after December 31, 2007. Adoption of
SAB 110 is not expected to have a material impact on the Company's consolidated
financial statements.
12
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
ACCOUNTS RECEIVABLE, NET JUNE 30, 2008 DECEMBER 31, 2007
------------------------ -------------------- --------------------
Accounts Receivable $ 93,522 $ 56,177
Allowance for Bad Debt (18,479) (11,143)
------------------ ------------------
Total Accounts Receivable, Net $ 75,043 $ 45,034
================== ==================
INVENTORY
---------
Finished Goods $ 84,660 $ 170,698
Demo units 72,424 85,206
Allowance for loss in inventory (20,050) (51,624)
------------------ ------------------
Total Inventory $ 137,034 $ 204,280
================== ==================
PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid Insurance $ 11,087 $ 23,038
Prepaid rent and deposit 1,013 2,065
Employee Advance 3,512 3,415
Other Prepaid Expenses 96,729 45,167
------------------ ------------------
Total Prepaid and Others $ 112,341 $ 73,685
================== ==================
PROPERTY AND EQUIPMENT, NET
---------------------------
Furniture and Fixtures $ 9,531 $ 9,531
Equipment 40,530 40,530
Software 5,757 5,757
------------------ ------------------
55,818 55,818
Accumulated Depreciation (41,709) (37,754)
------------------ ------------------
Total Property and Equipment, Net $ 14,108 $ 18,064
================== ==================
ACCRUED LIABILITIES
-------------------
Warranty reserve $ 4,491 $ 11,339
Accrued payroll and related taxes 113,244 120,887
Accrued consulting fees 245,527 254,967
Commissions payable 18,467 -
Deferred Revenues 45,000 -
Accrued vacation 20,648 18,072
Accrued professional fees 144,693 136,413
Related party payable 4,190 42,165
Other accrued liabilities 359,153 210,915
------------------ ------------------
Total Accrued Liabilities $ 955,413 $ 794,758
================== ==================
13
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 4 - OTHER INTANGIBLE ASSETS
During the six months ended June 30, 2008, the Company capitalized intellectual
property cost of $ 12,775 and expensed intellectual property that the Company
stopped pursuing which was previously capitalized at a cost of $46,504. The
Company's intangible assets consisted of the following at June 30, 2008 and
December 31, 2007:
JUNE 30, 2008 DECEMBER 31, 2007
-------------------- --------------------
Pending Intellectual Property $ 94,789 $ 128,518
Awarded patents 21,954 21,954
Accumulated amortization (549) -
------------------ ------------------
Total Accounts Receivable, Net 116,194 150,472
================== ==================
Amortization of intangibles was $549 for the six months ended June 30, 2008. No
amortization of intangibles was recorded for the six months ended June 30, 2007
as no patents were awarded as of that date.
Based on the carrying amount of the intangibles as of June 30, 2008, and
assuming no impairment of the underlying assets, the estimated future
amortization is as follows:
Years ended December 31,
--------------------------
2008 (from July 1, 2008) $ 549
2009 1,098
2010 1,098
2011 1,098
2012 and over 17,563
----------------
Total $ 21,406
================
14
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 5 - SETTLEMENT ON NOTES RECEIVABLE
In March 2007, the Company entered into a settlement agreement with a former
employee who created indebtedness to the Company of $49,489 in 2001 to 2004 and
had agreed to a Note Receivable (Receivable). The employee had been in default
on payments on this Receivable, which was fully reserved in 2004. The agreement
calls for the former employee to repay the Company $55,000 at a rate of $4,000
per month beginning in April 2007. The Company collected $24,000 through June
30, 2008. The former employee is nine months in arrears of payments as of June
30, 2008. In May 2008, the Company collected 1,000,000 preferred stocks of a
public company which was provided as a security in the agreement. The stocks
were classified as trading securities, of which the shares were reported in the
balance sheet at fair value with realized and unrealized gains and losses
included in current period operations. The fair market value at the time of
collection was $900. An unrealized loss of $400 was recorded at June 30, 2008.
NOTE 6 - BORROWINGS
LONG-TERM DEBT
June 30, 2008 December 31, 2007
-----------------------------------------------------------------------------------------------------
Installment note payable secured by computer equipment.
Monthly payments total $81, including interest at 18.99%.
The original note amount was $2,062. Matures July 21, 2009. $ 864 $ 1,297
Reconstructed note payable to related party. Monthly interest
payment only at 13% through January 31. 2008. Effective
February 1, 2008, principal and interest payment based on a
36-month amortization. Matures August 1, 2009. (a) 237,183 268,552
Note payable to S&S Health Products, Inc maturing on April 1,
2011. The note provides for monthly payments of interest only
at the rate of 10% per annum. (b) 150,000 -
-----------------------------------------------------------------------------------------------------
388,047 269,849
Less: Current Maturities (83,101) (72,109)
-----------------------------------------------------------------------------------------------------
Long-term debt $ 304,946 $ 197,740
=====================================================================================================
(a) On June 30, 2007, the Company entered into an Agreement for Extension and
Amendment of a Note ("Agreement") with a related party. Under the
Agreement, the Company's subsidiary, OrthoNetx, Inc. executed an Amended
and Extended Promissory Note in favor of a related party, in the principal
amount of $268,551. The new note replaces a promissory note issued by
OrthoNetx, Inc. on January 30, 2005 in the original amount of $300,000.
The new note bears interest at 13% per annum, and provides for payments of
interest that commenced on August1, 2007. Payments of principal and
interest commenced on February 1, 2008, based on a 36-month amortization
schedule. All principal and interest is due on August 1, 2009. As of June
30, 2008, the Company has made all scheduled interest payments. Under the
Agreement, the Company entered into a Commercial Guaranty under which it
guaranteed payment of the note. Also, the related party entered into a
termination of guaranty to release the former CEO from his guaranty of the
original note.
15
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 6 - BORROWINGS (CONTINUED)
(b) The Note provides that if, on the second anniversary of the date of the
Note, AcuNetx has not set aside at least $100,000 for repayment of the
Note upon maturity, the principal of S&S has the right to compel AcuNetx
to conduct a private offering to raise the funds necessary to repay the
Note. The Note also provides that if AcuNetx is unable to pay the balance
at maturity, S&S is entitled to a penalty equal to 10% of the principal
balance of the Note, payable monthly until fully paid. As of June 30,
2008, no fund was set aside.
SERIES A CONVERTIBLE PROMISSORY NOTE
On May 21, 2007, VisioNetx Inc. conducted a private placement offering to sell
and issue convertible notes and detachable warrants up to $500,000. The offering
price is $50,000 per unit, each unit consisting of a convertible debenture in
the amount of $50,000 and a detachable warrant to purchase shares of VisioNetx
common stock. The note bears interest payable annually at 10% per annum, and is
due the earlier of (i) December 31, 2010 or (ii) two years from the closing date
of a minimum of $300,000 of units were sold. In the event that VisioNetx (i)
issues and sells its common stock for aggregate consideration of at least $3.5
million ("Qualified Financing") and (ii) the note has not been paid in full,
then the entire outstanding principal and all unpaid accrued interest of the
note shall automatically convert into shares of VisioNetx under the same terms
and conditions as those for investors in the Qualified Financing. Subscribers to
this offering will receive a warrant to purchase VisioNetx shares equal to a
150% of the common stock to be issued to investors in the Qualified Financing.
The warrants expire in seven years after the date of issuance.
The offering was closed on September 14, 2007. Through that date, VisioNetx had
sold one half of a unit and received $25,000 in proceeds. In consideration for
the release of the funds from escrow for the Company's working capital needs,
VisioNetx agreed to issue to the subscriber an additional warrant, with the same
terms and conditions as the previously issued warrant for an additional 50% of
the common stock to be issued to investors in a Qualified Financing.
The Company allocated the proceeds between the convertible note ($17,500) and
the warrants ($7,500) based on the management's subjective judgment as the
exercise price of the warrants and the conversion feature of the note were not
determinable. The warrants were classified as a component of equity and charged
against the note as a debt discount which will be amortized over the life of the
note using the effective interest method.
16
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 6 - BORROWINGS (CONTINUED)
CONVERTIBLE PROMISSORY NOTES
On November 9, 2007, VisioNetx Inc. initiated a private placement offering to
sell and issue convertible notes for up to $750,000. The offering price is
$50,000 per unit consisting of a convertible debenture in the amount of $50,000
which has underlying warrants. The notes bear interest payable annually at 8%
per annum, and are due the earlier of (i) eighteen months from the date of issue
or (ii) upon completion of a financing of New Securities, as defined, of at
least $2.0 million ("Qualified Financing"). Upon completion of a Qualified
Financing the note holder shall convert the principal and interest of this note
into the New Securities. Also upon conversion of the note, the note holder shall
received warrants to purchase up to 100% of the number of New Securities to be
issued. The warrants are exercisable for five (5) years.
June 30, 2008 December 31, 2007
--------------------------------------------------------------------------------------------------------------
10% Series A Convertible Promissory Note, matures on December 31, 2010 $ 25,000 $ 25,000
8% Convertible Promissory Notes, matures commencing May 18, 2009 90,000 75,000
--------------------------------------------------------------------------------------------------------------
115,000 100,000
Less: Unamortized debt discount (4,625) (6,125)
--------------------------------------------------------------------------------------------------------------
Convertible debt, net $ 110,376 $ 93,875
==============================================================================================================
NOTE 7 - INCOME TAXES
Provision for income taxes consisted of a minimum state franchise tax of $800
for six months ended June 30, 2008 and 2007.
The Company had removed the valuation allowance on December 31, 2003 because it
believed it was more likely than not that all deferred tax assets would be
realized in the foreseeable future and would be reflected as a credit to
operations. However, as of December 31, 2005, the Company's ability to utilize
its federal net operating loss carryforwards was uncertain due to the merger
with OrthoNetx which had net operating loss carryforwards of approximately $1.7
million. Thus a valuation reserve was provided against the Company's net
deferred tax assets.
As of December 31, 2007, the Company has net operating loss carryforwards of
approximately, $6,800,000 and $4,300,000 to reduce future federal and state
taxable income, respectively. To the extent not utilized, the federal net
operating loss carryforwards will begin to expire in fiscal 2009 and the state
net operating loss carryforwards will begin to expire in fiscal 2012.
17
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 8 - STOCKHOLDERS' EQUITY
SALES OF COMMON STOCK
In May 2008, the Company sold 71,429 equity units, consisting of 71,429 shares
of common stock and warrants, and received $5,000 in gross proceeds under the
April 2008 self-written offering.
In February 2008, the Company sold 215,000 equity units, consisting of 215,000
shares of common stock and warrants, and received $15,050 in gross proceeds
under the May 2007 self-written offering.
COMMON STOCK RETIREMENT
In March 2007, the Company retired 483,100 shares of its common stock to rescind
an equity-method investment. The market value of the shares returned to the
Company at closing was equal to the carrying value. Accordingly, the Company did
not recognize any gain or loss on this transaction.
NOTE 9 - STOCK OPTIONS
ACUNETX, INC.
On March 27, 2006 the Board of Directors approved and adopted the 2006 Stock
Option Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to employees and nonstatutory options to consultants and
other service providers. Generally, all options granted to employees and
consultants expire ten and three years, respectively, from the date of grant.
All options have an exercise price equal to or higher than the fair market value
of the Company's stock on the date the options were granted. Options generally
vest over three years. The plan reserves 14 million shares of common stock under
the Plan and is effective through December 31, 2015.
18
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 9 - STOCK OPTIONS (CONTINUED)
A summary of the status of stock options issued by the Company as of June 30,
2008 and 2007 is presented in the following table.
2008 2007
---------------------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
---------------------------------------------------------------
Outstanding at beginning of year 5,525,768 $0.15 7,309,102 $0.21
Granted 3,830,000 $0.07 1,500,000 $0.09
Exercised, Expired and Cancelled $0.00 (3,360,000) $0.21
---------------- ----------------
Outstanding at end of period 9,355,768 $0.12 5,449,102 $0.20
================ ================
Exercisable at end of period 7,855,768 $0.12 4,449,101 $0.17
================ ================
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes Merton option valuation model. The assumptions are
listed in the table below. Expected volatilities are based on the historical
volatility of the Company's stock. The risk-free rate for periods within the
expected life of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
2008 2007
Weighted average fair value per option granted $0.06 $0.09
Risk-free interest rate 3.28% 4.75%
Expected dividend yield 0.00% 0.00%
Expected lives 5.00 5.00
Expected volatility 134.64% 120.88%
The following table sets forth additional information about stock options
outstanding at June 30, 2008:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
--------------------------------------------------------------------------------
$0.01-$0.30 7,855,768 3.67 years $ 0.12 7,855,768
19
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 9 - STOCK OPTIONS (CONTINUED)
VISIONETX, INC.
On August 16, 2007, the shareholders of VisioNetx, Inc. approved the adoption of
the 2007 Stock Incentive Plan to provide for the issuance of incentive stock
options and/or nonstatutory options to officers, directors, employees, and
consultants who provide services to VisioNetx. All options have an exercise
price equal to or higher than the fair market value of VisioNetx common stock on
the date the options were granted. Options generally vest over three years and
are exercisable from five to ten years from the date of grant. The plan reserves
1 million shares of common stock.
2008
----------------------------
Weighted
Number Average
of Exercise
Shares Price
--------------- ------------
Outstanding at beginning of year 479,500 $0.10
Granted 96,000 $0.10
Exercised/Expired/Cancelled - $0.00
---------------
Outstanding at end of period 575,500 $0.10
===============
Exercisable at end of period 284,072 $0.10
===============
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes Merton option valuation model. The assumptions are
listed in the table below. Expected volatilities are based on the historical
volatility of the Company's stock. The risk-free rate for periods within the
expected life of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
2008
------------
Weighted average fair value per option granted $0.04
Risk-free interest rate 3.45%
Expected dividend yield 0.00%
Expected lives 5.00
Expected volatility 134.64%
As of June 30, 2008 there was $14,679 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
plans. That cost is expected to be recognized over a weighted average period of
1.81 years.
20
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 9 - STOCK OPTIONS (CONTINUED)
The following table sets forth additional information about stock options
outstanding at June 30, 2008:
A summary of the status of stock options issued by VisioNetx as of June 30, 2008
is presented in the following table.
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
--------------------------------------------------------------------------------
$ 0.10 575,500 7.42 years $ 0.10 284,072
NOTE 10 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 2007
------------------------------------------------------------------------------------------------------------------------
Numerator:
Net loss $ (129,465) $ (192,541) $ (534,904) $ (482,096)
------------------------------------------------------------------------------------------------------------------------
Denominator:
Weighted average of common shares 65,405,499 62,448,443 65,345,856 64,743,612
------------------------------------------------------------------------------------------------------------------------
Net loss per share-basic and diluted $ (0.002) $ (0.003) $ (0.01) $ (0.01)
As the Company incurred net loss for the three and six months ended June 30,
2008, the effect of dilutive securities totaling 304,098 and 1,714,476
equivalent shares, respectively, have been excluded from the calculation of
diluted net loss per share because their effect are anti-dilutive.
Stock options and warrants to purchase approximately 14,582,436 shares of the
Company's common stocks were outstanding, but were not included in the
computation of diluted net loss per share for the three and six months ended
June 30, 2007 because the exercise price of the stock options and warrants was
greater than the average share price of the common shares, and, therefore, the
effect would have been anti-dilutive.
21
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 11 - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
During the three months ended June 30, 2008 and 2007, sales to major customers
(those exceeding 10% of the Company's net revenues) approximated 64.9% and
54.2%, respectively, of the Company's consolidated net revenues. Approximately
27.1% and 54.2% of revenues for the three months ended June 30, 2008 and 2007
respectively, were to an independent distributer. Approximately 27.1% and 0% of
revenues for the three months ended June 30, 2008 and 2007 respectively, were
from another independent distributor. Approximately 10.7% and 0% of revenues for
the three months ended June 30, 2008 and 2007 respectively, were from a state
university. In addition, accounts receivable balances of such major customers
approximated 56.0% of the Company's total accounts receivable balance at June
30, 2008.
The loss or substantial reduction of the business of any of the major customers
could have a material adverse impact on the Company's results of operations and
cash flows.
The Company maintains cash deposits with major banks, which from time to time
may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that the risk of any loss
is minimal.
NOTE 12 - SEGMENT INFORMATION
The Company evaluates its reporting segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The Chief
Executive Officer has been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131. The Chief Executive Officer allocates resources to each
segment based on their business prospects, competitive factors, net sales and
operating results.
The Company has three market-oriented operating segments: (i) IntelliNetx
division, (ii) OrthoNetx, Inc., and (iii) VisioNetx, Inc. The IntelliNetx
division markets patented medical devices that assist in the diagnosis of
dizziness and vertigo, and rehabilitate those in danger of falling as a result
of balance disorders. The OrthoNetx division markets patented medical devices
that mechanically induce new bone formation in patients with skeletal
deformities o the face, skull, jaws, extremities and dentition. The VisioNetx
division markets patented products that track and analyze human eye movements
for impairment screening. The Company also has other subsidiaries that do not
meet the quantitative thresholds of a reportable segment.
The Company reviews the operating companies' income to evaluate segment
performance and allocate resources. Operating companies' income for the
reportable segments excludes income taxes and amortization of goodwill.
Provision for income taxes is centrally managed at the corporate level and,
accordingly, such items are not presented by segment. The segments' accounting
policies are the same as those described in the summary of significant
accounting policies.
The Company does not track its assets by operating segments. Consequently, it is
not practical to show assets by operating segments.
22
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
Summarized financial information of the Company's results by operating segment
is as follows:
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 2007
---------------------------------------------------------------------------------------------------
Net Revenue to external customers:
INX $ 285,463 $ 669,519 $ 486,285 $ 1,789,065
ONX - - 18,766 -
VNX - 8,955 - 13,355
-----------------------------------------------------------
Consolidated Net Revenue to
external customer $ 285,463 $ 678,474 $ 505,051 $ 1,802,420
---------------------------------------------------------------------------------------------------
Cost of Revenue:
INX $ 56,854 $ 127,122 $ 147,604 $ 353,707
ONX 2,968 - 42,280 -
VNX - 1,158 - 3,027
-----------------------------------------------------------
Consolidated Cost of Revenue $ 59,822 $ 128,280 $ 189,884 $ 356,734
---------------------------------------------------------------------------------------------------
Gross Margin:
INX $ 228,609 $ 542,397 $ 338,681 $ 1,435,358
ONX (2,968) - (23,514) -
VNX - 7,797 - 10,328
-----------------------------------------------------------
Consolidated Gross Margin $ 225,642 $ 550,194 $ 315,168 $ 1,445,686
---------------------------------------------------------------------------------------------------
Inter-segment transactions are recorded at cost. The margins reported reflect
only the direct controllable expenses of each line of business and do not
represent the actual margins for each operating segment because they do not
contain an allocation of product development, information technology, marketing
and promotion, stock-based compensation, and corporate and general and
administrative expenses incurred in support of the lines of business.
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 2007
-----------------------------------------------------------------------------------------------------
Total margin for reportable segments $ 225,642 $ 550,194 $ 315,168 $ 1,445,686
Corporate and general and administrative
expenses (336,817) (717,952) (666,562) (1,757,359)
Stock option expenses 3,787 (19,441) (142,996) (158,518)
Impairment of goodwill 0 0 0 (362)
Interest and Other Expense (26,165) (13,344) (46,963) (23,006)
Gain (loss) on equity-method investments 0 0 0 0
Interest and Other Income 1,620 8,002 2,958 12,263
----------------------------------------------------------
Net loss before income taxes and minority $ (131,933) $ (192,541) $ (538,395) $ (481,296)
==========================================================
23
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 13 - RELATED PARTY TRANSACTION
The Company's employees periodically pay business-related expenses using
personal funds. Until reimbursed, these expenses are recorded in "Accrued
Liabilities" and listed as "Related party payables" in the balance sheet details
above. At June 30, 2008 the company had a current related party payable to the
Company's CEO, in the amount of $3,869.
In June of 2008, the Company decided to discontinue maintenance fee payments
related to its Limb Lengthener intellectual property petition. At that time, the
Company entered into an assignment agreement with a related party. In exchange
for consideration of $1, the party agreed to maintain the patent at its
discretion, without obligation, and at its expense. It further agreed that, upon
patent approval, it would give AcuNetx Inc. first right of refusal to repurchase
the assignment by reimbursing its expenses plus ten percent (10%) for a period
of 90 days from the date of issuance.
NOTE 14 - GUARANTEES AND PRODUCT WARRANTIES
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of June 30, 2008.
In general, the Company offers a one-year warranty for most of the products it
sells. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
24
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 14 - GUARANTEES AND PRODUCT WARRANTIES (CONTINUED)
The following table presents the changes in the Company's warranty reserve
during the first six months of 2008 and 2007:
For the Six Months Ended June 30, 2008 2007
---------------------------------------------------------------
Beginning balance 11,339 7,200
Provision for warranty (6,847) 3,588
Utilization of reserve 0 (1,800)
---------------------------------------------------------------
Ending balance 4,492 8,988
---------------------------------------------------------------
NOTE 15 - SUBSEQUENT EVENT
On July 14, 2008, Ronald A. Waldorf, President and Acting Chief Financial
Officer of the Company, resigned from those positions for personal and health
reasons. At the time of his departure, the Company owed Ronald A. Waldorf an
accrued salary of $16,668 and accrued vacation of $16,954.
Robert S. Corrigan, Chairman of the Board of Directors, was appointed as
President and Acting Chief Financial Officer on an interim basis to replace Mr.
Waldorf.
Mr. Waldorf remains a member of the Board of Directors.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations ("MD&A") supplements the accompanying consolidated financial
statements and notes to help provide an understanding of AcuNetx Inc.'s
financial condition, changes in financial condition and results of operations.
MD&A is organized as follows:
o Cautionary statement concerning forward-looking statements. This section
provides a description of the use of forward-looking information contained in
this report.
o Business overview. This section provides a description of the Company's
business and recent developments the Company believes are important in
understanding the results of operations and financial condition.
o Financial condition and liquidity. This section provides an analysis of
the Company's financial condition as of June 30, 2008 and cash flows for the six
months ended June 30, 2008.
o Results of operations. This section provides an analysis of the Company's
results of operations for the six months ended June 30, 2008.
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Information in this Item 2, "Management's
Discussion and Analysis or Plan of Operation," and elsewhere in this 10-QSB that
does not consist of historical facts, are "forward-looking statements."
Statements accompanied or qualified by, or containing, words such as "may,"
"will," "should," "believes," "expects," "intends," "plans," "projects,"
"estimates," "predicts," "potential," "outlook," "forecast," "anticipates,"
"presume," and "assume" constitute forward-looking statements and, as such, are
not a guarantee of future performance. The statements involve factors, risks and
uncertainties, the impact or occurrence of which can cause actual results to
differ materially from the expected results described in such statements. Risks
and uncertainties can include, among others, fluctuations in general business
cycles and changing economic conditions; changing product demand and industry
capacity; increased competition and pricing pressures; advances in technology
that can reduce the demand for the Company's products, as well as other factors,
many or all of which may be beyond the Company's control. Consequently,
investors should not place undue reliance on forward-looking statements as
predictive of future results. The Company disclaims any obligation to release
publicly any updates or revisions to the forward-looking statements herein to
reflect any change in the Company's expectations with regard thereto, or any
changes in events, conditions or circumstances on which any such statement is
based.
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, included
elsewhere in this Quarterly Report on Form 10-Q. Except for the historical
information contained in this report, the following discussion contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Quarterly Report on Form 10-Q should be read
as being applicable to all related forward-looking statements wherever they
appear in this Quarterly Report on Form 10-Q. The Company's actual results may
differ materially from the results discussed in the forward-looking statements,
as a result of certain factors including, but not limited to, those discussed
elsewhere in this Quarterly Report on Form 10-Q.
26
BUSINESS OVERVIEW
AcuNetx Inc. is an innovative medical, law enforcement, workplace safety and
optical polygraph equipment manufacturer and retailer. During the first half of
2008, medical related products accounted for 90.5% of the Company's revenues.
The balance of the revenues came from law enforcement and optical polygraph
sales. While the Company's medical product lines are being sold in a relatively
mature market, recent research indicates additional markets may be suitable for
the Company's newer product lines, and the company will continue to actively
explore those opportunities with distributors and partners both in the United
States and Internationally.
Several developing initiatives are important to the Company's future success.
First, the creation of VisioNetx, Inc. establishes a more effective and
efficient capitalization structure to help promote the Company's workplace
safety and law enforcement product lines. Second, AcuNetx Inc. licensed the
HawkEye(TM) eye observation and recording system from VisioNetx to help provide
additional resources to promote the law enforcement product lines. Third, the
Company is ramping up product development, marketing, and sales activities for
both its new and existing Videonystagmography (VNG) medical equipment product
lines, to help meet what the Company expects to be a growing global demand for
balance assessment and fall prevention for the sick and elderly.
Historically, the Company's VNG product line was aimed at specialized
physicians. While remaining in this market has proven that the Company's VNG
systems have gained general acceptance among its specialist customers, the
market of primary care physicians is significantly larger. Therefore, the
company believes that focusing on primary care physicians has the potential to
develop into a substantially larger growth market. As a result, during the first
half of 2008, the company introduced a new more affordable VNG medical device
aimed at primary care physicians and will continue to pursue this market going
forward.
The Company believes that the OrthoNetx product line still has potential value
in its marketplace, and the relationship with Robinson MedSurg LLC is an
important step in maximizing that opportunity.
FINANCIAL CONDITION AND LIQUIDITY
GOING CONCERN
The Company's independent auditors have included an explanatory paragraph in
their report on the June 30, 2008 consolidated financial statements discussing
issues which raise substantial doubt about the Company's ability to continue as
a "going concern." The going concern qualification is attributable to the
Company's operating losses during the year and the amount of capital which the
Company projects it needs to satisfy existing liabilities and achieve profitable
operations.
Management understands the comments in the auditor's report relative to the
Company as a going concern. We have taken a number of actions, described in the
footnotes, to reduce expenses and conserve cash. All activities will be focused
on maintaining our ability to ship our VNG medical equipment line of products,
as well as the HawkEye (TM) law enforcement product lines, which continue to
serve as our source of revenue. These activities will include maintaining the
excellent relationships already formed with our suppliers, distributors, and
customers. Any future expenses not related to this core business will be
examined in the light of our current liquidity position before approval.
Management believes that the plan that has been implemented will allow
continuing operations and improvements over time.
CURRENT ASSETS
Current assets decreased by $85,623 from December 31, 2007 to June 30, 2008
primarily due to a lower cash balance, but also to a lower inventory balance.
These decreases were offset, to a lesser extent, by higher prepaid expenses,
accounts receivable, restricted cash balances and other current assets.
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OTHER INTANGIBLE ASSETS
Other intangible assets decreased by $34,278 from December 31, 2007 to June 30,
2008 primarily due the Company's assignment of its Limb Lengthener. This
decrease was partially offset by an increase of $12,226 resulting from the
Company's decision to advance its optical polygraph equipment intellectual
property petition.
CURRENT LIABILITIES
Current liabilities have increased by $128,142 from December 31, 2007 to June
30, 2008 primarily due to higher accrued liabilities, but also to a higher
current portion of long-term debt. The primary reason for the increase in
current liabilities is a $100,000 accrual in May of 2008 relating to a sales
agreement with a major distributor. The increase in accrued expenses was
partially offset by a decrease of $43,596 in accounts payable.
LONG-TERM DEBT
Long-term debt increased by $123,616 from December 31, 2007 to June 30, 2008
primarily due to the issuance of a new note payable in the amount of $150,000,
but also to a lesser extent, due to the result of other long-term borrowing.
This increase was partially offset, by debt payment of approximately $31,000.
STOCKHOLDERS' DEFICIT
Stockholders' deficit increased by $371,698 from December 31, 2007 to June 30,
2008 primarily due to a net loss for the period. This decrease was offset, to a
lesser extent, by a $162,919 increase in Paid-in capital for the same period.
The increase in Paid-in capital was primarily due to the increase in stock
option expense.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2008, the Company had $517,537 in current assets. This includes
$102,014 in non-restricted cash and cash equivalents and $91,105 in restricted
cash. Net accounts receivable was $75,043 and inventory was $137,034.
The Company had $1,390,075 in current liabilities, which included accounts
payable of $351,561. The Company also had accrued liabilities of $955,413 and a
current portion of long term debt of $ 83,101. Long-term liabilities were
$415,322. As of June 30, 2008, AcuNetx had an accumulated deficit of
$12,276,487.
AcuNetx has no plans for significant capital equipment expenditures for the
foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
MATERIAL COMMITMENTS
The Company has no material commitment to make capital equipment expenditures.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO SIX MONTHS ENDED JUNE 30, 2007
The six months ended June 30, 2008 and 2007 represent the combined results of
AcuNetx, Inc. and its subsidiaries, OrthoNetx Inc. and VisioNetx Inc.
A significant aspect of the Company's year-to-year comparison is a change in
revenue recognition relating to one of the company's major distributors. During
the first half of 2007, the Company sold its products directly to end customers
and paid the distributor sales commissions based on sales to these customers.
Since July of 2007, the Company sells its products directly to this distributor
at wholesale prices. This change results in lower revenues for the same unit
volume of sales, along with lower gross profits, as costs do not change.
Correspondingly, a decrease in commission expense occurs as the distributor is
no longer receiving commissions.
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Revenues during the six months ended June 30, 2008 were $505,051 compared to
$1,802,420 for the corresponding period in 2007. System unit shipments decreased
to 27 units in the first six months of 2008 from 49 units in the same period of
the prior year as a result of two significant factors: (i) the overall
uncertainty with the domestic economy, and (ii) the lack of funds to adequately
market the company's products. Gross profit, as a percentage of sales, decreased
from 80% to 62%. Total operating expenses decreased by $1,106,681, from
$1,916,239 in the first half of 2007 to $809,558 in the first half of 2008.
Selling, general and administrative expenses decreased from $1,757,359, in the
first half of 2007, to $666,562 in the first half of 2008. Net loss increased
from $482,096 in the first half of 2007 to $534,904 in the first half of 2008.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Per Item 305(e) of Regulation S-K, a smaller reporting company is not required
to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the Company's disclosure controls and procedures. Based upon
that evaluation, our CEO and CFO concluded that as of June 30, 2008 our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company required to be included in the
Company's periodic filings with the SEC, such that the information relating to
the Company required to be disclosed in SEC reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms, and (ii) is accumulated and communicated to the Company's management,
including our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
There has been no material change in our internal control over financial
reporting during the three months ended June 30, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In May 2008, the Company sold 71,429 units, each consisting of one share of
Common Stock and a warrant to purchase one share of Common Stock, to a small
group of private investors. The Company received gross proceeds of $5,000.
The Company believes the offer and sale of the units was exempt from the
registration requirements of the Securities Act of 1933 by reason of Section
4(2) thereof and Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
31.1 Certification of the Company's Chief Executive Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2 Certification of the Company's Chief Financial Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
32.1 Certification of the Company's Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certification of the Company's Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 14, 2008 By: /s/ Robert S. Corrigan
----------------------
Robert S. Corrigan, Chief Executive Officer
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